The Extent Of Bad Loan Crisis At Indian Banks Is Becoming Clearer And It's Terrifying

A money lender counts Indian rupee currency notes at his shop in Ahmedabad, in this May 6, 2015 file photo. REUTERS/Amit Dave/Files

There’s been plenty of talk and sermonising directed at Indian banks to clean up their pile of bad loans. But the latest quarterly results ending March show exactly how gruesome the picture is after banks were forced to report their bad loans and non-performing assets by the Reserve Bank of India. Here’s a recap:

1) The combined gross bad loans for 38 out of 39 listed banks nearly doubled to about ₹5.8 trillion at the end of the March quarter compared to the same period last year, an analysis by Mint showed. The quarters ending March, and December 2016 added over ₹1 trillion each in bad loans. Public sector banks account for about 90 per cent of all bad loans.

2) For the latest quarter ending March, 15 out of 25 public sector banks swung to combined net losses of about ₹23,493 crores, compared to combined net profit of ₹8,500 crores in the same quarter last year. The biggest losses were posted by Punjab National Bank (at ₹5,367 crores), Canara Bank (₹₹ ₹3,905 crores), Bank of India ( ₹3,587 crores), and Bank of Baroda ( ₹3,230 crores). The reported net losses excluded any tax-related benefits.

3) There is a silver lining, however, as the private sector banks didn’t report net losses in the latest quarter. But even private sector banks saw net profits slip 14 percent from a combined ₹10,254 crores last year. The private sector banks have fared better in part because of the higher interest income they earn compared to the public sector banks.

4) The combined net losses and red ink can be attributed to the ‘provisions’ that the banks have had to do to account for their bad loans and non performing assets. Data analysis by Mint’s research bureau showed such provisions rose 87 per cent in 2016—from ₹93,698 crore to ₹1.75 trillion.

Banks have had to clean up their balance sheets and report non-performing assets (NPAs) or bad loans as part of a massive clean-up drive, also known as ‘asset quality review,’ which was prompted RBI last year. RBI Governor Raghuram Rajan has often referred to the clean-up as “deep surgery” necessary to stabilise the Indian financial system.

However, the situation at Indian banks could get worse –- 8 out of 15 bankers and market analysts that Mint surveyed expect further declines in the asset quality of banks for the next two quarters. An analyst at India Ratings and Research, an affiliate of credit ratings agency Fitch, told Reuters recently that he estimates that India’s bad loans could be bigger than New Zealand's $170 billion economy.

Separately, an important safety net that guards liquidity at banks appears to have shrunk over the last two decades. Indian banks’ cash reserve ratio (CRR), or the portion of deposits that commercial banks are required to keep with RBI–-and which in turn help banks hedge against liquidity crunch--has come down to 4 per cent currently compared to 14.5 per cent in 1993.